A new World Bank report details a worsening of Papua New Guinea’s economic prospects and finances. It says that the country is ‘steadily’ losing foreign exchange.

A new World Bank report warns that Papua New Guinea is headed for a forex squeeze. Credit: VM_Studio/iStock

A report by the World Bank says that Papua New Guinea’s public debt ‘may exceed 40 per cent of GDP and remain there for the foreseeable future’ putting pressure on the sustainability of the government’s fiscal and debt position.

It says in 2019 there was an increase in the Bank of Papua New Guinea’s ‘net holdings of government debt’, suggesting a return to the practice of the central bank ‘financing the government budget.’

This practice, the report says, ‘may put further pressure on foreign exchange reserves,’ adding that in 2019 outflows on the financial account were at record levels.

‘The country is losing foreign exchange steadily. Gross international reserves fell by US$35 million a month in the first nine months of 2019, to US$1.9 billion at end-September. This trend is even more concerning when the nearly US$1 billion was borrowed externally in 2018.’

The report notes there has been a ‘sharp rise in payments of dividends abroad, which is adding to the foreign exchange shortage.’

Resource projects needed

Consumer price inflation fell from 4.9 per cent in the third quarter of 2018 to 3.3 per cent in the same period of 2019 due to a softening of domestic demand, a strengthening of the kina, and an easing of telecommunications costs.

The 10-year, US$500 million sovereign bond, issued in 2018, attracted an annual interest rate of 8.375 per cent, ‘signaling an upper bound for interest rates’.

‘A child born in Papua New Guinea will be only 38 per cent as productive when she grows up as she could be if she enjoyed a complete education and full health based on the Human Capital Index (HCI) score’

The report says that while the ‘growth outlook remains positive’, projected GDP growth rates are lower than the bank’s previous forecasts, ‘mainly due to delays in finalising agreements and launching implementation of large new resource projects’.

The news this week that the Wafi-Golpu project has cleared its legal hurdle surrounding the contentious Memorandum of Understanding is a step in the right direction.

Real (after inflation) GDP growth is forecast to be 2.9 per cent this year.

Increasing human capital

The Marape Manifesto is right to put emphasis on human capital according to a new World Bank report.

The report has provided support to Prime Minister James Marape’s emphasis on developing the people of Papua New Guinea. It says that investing in ‘human capital’ is critical for Papua New Guinea’s future growth and development. Human capital is defined as: the ‘health, knowledge, skills and resilience’ that people accumulate.

‘A child born in Papua New Guinea will be only 38 per cent as productive when she grows up as she could be if she enjoyed a complete education and full health based on the Human Capital Index (HCI) score,’ the report says.

This claim aligns with The Marape Manifesto, a blueprint for government that aims to migrate half of the citizenry to ‘some form of business, including SMEs by 2030′; to allocate 10 per cent of the budget to health and education; and to ensure that every child gets a ‘minimum of 12 years of foundational education and post-year 12 education’.

Types of capital

The World Bank provides a measurement of the types of capital that have been amassed in PNG. Three quarters is ‘natural capital’ (which includes resources forestry and agriculture) and only 22 per cent is human capital.

By contrast, in Australia human capital accounts for 56 per cent of the accumulated wealth and natural capital only 17 per cent.

‘Almost 50 per cent of the country was born during the last two decades’

‘By any measure, Papua New Guinea is lagging its major trading partners in terms of its ability to create productive physical and human capital.

‘With the country at an early stage in the demographic transition, investing in people now would allow Papua New Guinea to reap demographic dividends in the future.

‘Papua New Guinea’s population is growing at a high rate of 2.3 per cent per annum. Almost 50 per cent of the country was born during the last two decades, with 38 per cent of the population below the age of 15 years.’